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Ah, the age old argument. When is it better to save money, when to pay off debt? There is lots of advice out there for either side.

BENEFITS OF SAVING MONEY

During a job transition, it can be quite common to have a gap in cash flow. The new job may pay on a different schedule than the old one, and you may find yourself with an extra week or two waiting for that deposit. Additionally, if there was any time off between jobs that was not covered by accrued vacation or PTO, your bank account could be depleted more than usual. If you end up short, and you have no savings, what will you do? Rely on the credit card and add to your debt. If you have savings, you can cover it without using credit cards.

BENEFITS OF PAYING OFF DEBT

One major benefit of paying off debt is that, more than likely, you have credit cards that have higher interest rates than you could earn from your money in a savings account. Any principal that you pay off lowers the amount of money that you are paying interest on, essentially giving your money the power of the principal plus the interest rate. So if you pay off a credit card with a 14% interest rate, the money used to pay it off just earned you 14%. Paying off your debt lowers your monthly bills and works toward getting out of that depressing hole of debt.

THE DOWNSIDE OF PAYING OFF DEBT

So it sounds like paying off debt is a better use of your money, right? Maybe not. Let's say you take $500 and pay down a car payment that has 5% interest. Then you wind up short at the end of the month and have to pay for groceries with a credit card that has 9.99% interest. That increases the amount of debt you have at a higher rate than before. And, even worse, if you need to take out a cash advance from a credit card you may pay as much as 24-34% interest plus a transaction fee.

But what if you don't do that, and instead you pay down the high rate credit card? That's a better choice, but what will you do if you still end up short? Use the credit card or cash advance again. With no savings, the only tools available to you to handle unexpected shortages are credit cards. This keeps you in the cycle of adding to your debt as fast or faster than you can pay it off, keeping you in debt longer.

When your career or finances are in flux, your best bet is to save as much money as you can. It's true that even if it is in an interest-bearing account, you won't earn as much interest as paying off the debt would. But you need the money to be readily available. Knowing you can cover your bills without adding to your debt is quite a relief. This is especially important during a transition, because even if you are moving to a better opportunity there is still a lot of stress involved. You will be meeting new people, need to be on your best behavior, learning new tasks and procedures, and getting oriented to the workplace. It can be both exhilarating and exhausting. Having peace of mind about your finances will be very helpful.

Once things settle down, then you can focus on paying off your debt. If there's extra money in your savings, apply some of it to the credit card with the highest interest rate. Realize that paying off debt is a slow process, it won't happen overnight. If possible stop using the card that you are paying off. This will help you to see the progress you are making. Once that card is paid off, take the amount you were paying on it and add it to the amount that you have been paying on another debt. The process will then speed up significantly.

Before you know it, you will have made it through the job transition, have a bit of savings, and paid down your debt.

Learn more about this author, Alexis Whaley.
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